Is The Second Dip Imminent?

For a while, we have expected the "Second Dip" of this Double-Dip Hyper-Inflationary Depression to materialize.  It sure looks like it's here.

While the economic statistics suggesting at least some economic recovery continue to pour in, behind the numbers, a much darker picture is being drawn.

The main culprit in the imminent downturn is the ongoing systemic evaporation of liquidity.  The canaries in the coal mine are the world stock markets, which have suddenly begun to plunge precipitously along with world credit markets. 

In addition, there are plenty of excellent and accurate leading indicators that have been screaming that a more vigorous downturn is immediately ahead.

The most ominous is the unprecedented shrink in the broad aggregates of our money supply. 

Real M3, the broadest measure of money and liquidity has dropped by an unprecented 7% in the last 12 months, according to Shadow Stats (http://www.shadowstats.com/).  While there have been instances when the economy has fallen into recession without money supply contracting first, there are NO examples of a prolonged drop in money which has NOT been followed by a sharp economic crunch.

Whenever real M3 has contracted on a year-to-year basis, the economy always has followed, either falling into recession, or if already in recession, intensifying.  If liquidity contracts, the broad economy will inevitably suffer.  The present contraction in broad liquidity is the deepest of the post-World War II era.  Historically, the lead time between the liquidity signal and economic activity is roughly six-to-nine months.

A major component of money creation is the Commercial and Industrial Loan market, which according to the Federal Reserve Board, has fallen by a mind-numbing 25% from its peak in late 2008!  If the economy were truly healthy and business expanding, this data set would be turning up rather than plunging.   Commercial Paper outstanding has dropped by a staggering 50% since its peak in 2007! 

These are both foretelling more problems in the banking sector with the reductions demonstrating just how poor the condition of the credit markets are.

The other issue to consider is that the Obama Adminstration, Federal Reserve (FED) and Department of Treasury are completely out of bullets.  Given the combination of extra-ordinary stimulus packages, ZERO interest rates and aggressive market bail-outs like TARP, the economy ought to be humming along.  At this point, there are few options left.

Add to that, the meltdown in Sovereign Debt in Europe, the massive worldwide budget deficits and runaway entitlement programs and it's obvious that further policy measures are not likely to be successful without experiencing a very painful period of economic adjustment.

One must ask the obvious question.  Will the economic downturn bring down hard assets like GOLD?  Temporarily perhaps, but ultimately the financial authorities will be forced to employ more desperate measures to restore liquidity.  These measures will absolutely spark the embers of hyper-inflation which will provide a very beneficial environment to trigger the next mania in precious metals and the underlying mining stocks.
Marko's Take

For our solution to the Budget Deficit, we proposed a two-part program last weekend.  The blogs can be read by clicking http://markostake.blogspot.com/2010/05/fixing-budget-mess-part-1-negative.html and http://markostake.blogspot.com/2010/05/fixing-budget-deficit-part-2.html.